Arkansas News

Note to Readers: This is the third of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.

California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

  • Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.
  • Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

  • Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

  • Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

  • Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”
  • Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

  • Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

  • Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

  • Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

  • State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  
  • State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

  • Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.
  • Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”
  • Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

  • Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

  • Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

 

Here’s a follow up to our previous post describing the effort to get a much needed severance tax increase on the ballot in Arkansas.  The former natural gas executive, Sheffield Nelson, who was behind the effort has said that he won’t have enough signatures to qualify this proposal for the November ballot.

Last month, a Louisiana Revenue Study Commission began looking into the state’s tax exemptions to see if these government handouts are effective. Now that Governor Bobby Jindal has been passed over as the Republican Vice Presidential nominee, it appears he’s going full speed ahead with revenue neutral tax “reform” efforts.  As part of the efforts to reform the tax structure and examine tax expenditures the Governor, other policymakers and taxpayers should review these new materials from the Louisiana Budget Project.

This week, Illinois Governor Pat Quinn signed into law legislation that imposes a new tax on strip clubs. Revenue generated from this new tax will fund programs for victims of sexual assault. By choosing to enact an entirely new tax that seems destined to raise little revenue, rather than enacting needed reforms in the taxes the state already levies, Illinois lawmakers have missed a chance to make the tax system fairer. The worthy goal of funding anti-abuse efforts would be better served by eliminating income, sales and corporate tax loopholes.

Iowa’s gas tax is at an all-time low and shrinking- and transportation infrastructure is suffering because of it.  Earlier in the year, we thought Governor Terry Branstad would champion an increase in the tax to address the state’s transportation funding needs.  Now we have learned the governor will only support a “modest” change in the gas tax if lawmakers first reduce property, personal income and corporate income taxes.  Which begs the question- how will Iowa pay for much needed road and bridge repairs if the state is left with even less revenue than it had before this so-called “reform” plan?

Photo of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0

As the back- to-school sales tax holidays season winds down, this Institute on Taxation and Economic Policy (ITEP) op-ed is a reminder that consumers and citizens “should not accept tax-free weekends as a replacement for the types of real reforms that clean out unnecessary breaks at the top and solve the problems that will still be there, long after this year's sales tax holidays have passed.”  

Arkansas Governor Mike Beebe has a message for Republican lawmakers bent on eliminating the state’s personal income tax: “If you’re going to eliminate the income tax, you better figure out where you’re going to get a couple billion just to stay where we are.”  The Arkansas Republican Party platform includes replacing the state’s personal income tax with what they call a “more equitable method of taxation.”  In Beebe’s words, “I don’t think there is more equitable… the income tax was designed to be more equitable than a flat, for example, sales tax.”

Now that Governor Jack Dalrymple has unveiled his tax cut plan, North Dakota voters (who rejected a ballot measure eliminating property taxes altogether in June) will hear from two gubernatorial candidates who want to cut property taxes, but in very different ways. While the incumbent, Dalrymple, would give across-the-board property tax cuts to every property owner (including profitable businesses and the wealthiest North Dakotans) and a token cut to older low-income adults, the Democratic challenger, Ryan Taylor, targets his tax cuts to homeowners and renters, with the largest cuts as a share of income going to low- and moderate-income taxpayers.  The Institute on Taxation and Economic Policy is working up a full analysis of the candidates’ competing tax plans, which have roughly the same revenue cost.

The Orlando Sentinel’s editorial board explains the “slow-motion disaster” that is Florida’s tax system, cataloging the lack of sales taxes on services (PDF) and online shopping taxes (PDF), and gasoline tax shortfalls (PDF), among others.

Special tax breaks for businesses frequently reward behavior that would have occurred anyway.  The most recent examples come from Florida, where Publix, CSX, TECO Energy, NextEra Energy, and Mosaic Co. are seeking millions in tax breaks for capital spending they were already planning to undertake.

Online shopping in the DC-Metro area is about to become more expensive, according to this Washington Post article.  Here’s why that’s a good thing for tax fairness, the Marketplace Fairness Act and state coffers.

Advocates for increasing the Arkansas severance tax rate on natural gas from 5 to 7 percent and eliminating exemptions turned in nearly 70,000 signatures on Friday. If the Secretary of State verifies enough signatures, the long overdue rate increase worth $250 million in annual revenues will be put on the November ballot. 

Check out New Jersey Governor’s Chris Christie talk at the Brookings Institution today on “Restoring Fiscal Integrity and Accountability”.  Christie used the first several minutes to give his view on the current tax cut standoff in the Garden State, claiming Democrats were playing politics by holding up his tax cut proposal (when in fact what they’re doing is the right thing).

There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax.  Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy (ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.

Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act.  Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history.  Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.

These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax.  ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes.  All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.

View the charts here, and read Building a Better Gas Tax here.

Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates.  It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s.  Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.

Example:

The Institute on Taxation and Economic Policy (ITEP) made a lot of noise (and news, newsnews) about sales tax holidays during the recent back to school season. Seventeen states offer sales tax holidays. The rules vary widely, but in most cases they mean consumers don’t have to pay sales taxes on back to school supplies, clothes, etc. for a few days. This past August for the first time, Arkansas offered a sales tax holiday of its own.  While the sales tax revenue figures are still coming in, it’s now clear that holiday cost the state about $2.1 million in lost revenues and an additional $710,000 loss in revenues for cities and counties that collect their own local sales taxes.

Naïve state officials hoped to see an increase in sales tax revenue based on the assumption that consumers would go out and purchase more taxable items. Indeed, sales tax holiday proponents often argue that sales tax holidays actually generate new sales tax revenue, as in this report from the Florida Retail Association.

But so far the Arkansas revenue figures aren’t showing much offsetting revenue generated. The Deputy Director of the Department of Finance and Administration, Tim Leathers has admitted they “couldn't detect any increase in consumers spending more money while they were in there buying school supplies." Revenue officials have yet to tally September’s sales tax revenues to see if there were shifts in consumption by month, but either way it seems that the sales tax holiday didn’t provide a real and needed boost for state coffers.

John Shelnutt, an economist with the Department of Finance and Administration said, “If it did shift consumption from month to month, we'll have to see…. Even then, it's not a clear story. We were below forecast for the first two months of the fiscal year, which begins July 1."

Another reason that Arkansas jumped on the sales tax bandwagon was lawmakers’ belief it would lure shoppers from neighboring states to take advantage of the holiday, but again, the numbers don’t show any evidence for this. The economist, Shelnutt, sees no “growth rate to suggest there was a cross-border rush to take advantage of the holiday.”

Myths about the utility of sales tax holidays abound.  Lawmakers too often believe these events are helpful to cash-strapped consumers, result in increased revenues and add out of state dollars to the economy.  But too often, like in Arkansas, the costs to the state as a whole far outweigh the modest benefit a handful of consumers enjoy.

We also know that not collecting sales tax on specific items for just a couple of days does nothing to help make a state’s overall tax structure more fair.  Lawmakers interested in really helping the most hard-pressed families and boosting their states’ economies have other tax reform options that offer long term and widespread benefits. Sales tax holidays, however, are more boondoggle than good policy. For  more on what they do and don’t accomplish, read ITEP’s brief.

Earlier this year, governors in West Virginia and Arkansas signed legislation to lower their states’ sales tax on food, a policy both had championed.  West Virginia lowered the state’s sales tax on food from 3 to 2 percent and Arkansas’ was reduced from 2 to 1.5 percent.

Unlike most states, West Virginia and Arkansas were doing just fine budget-wise, so the tax cut was “affordable” and did not come at the expense of critical and core public services, which are often sacrificed for tax cuts.  Pursuing cuts to food sales taxes also set Mike Beebe (AK) and Earl Ray Tomblin (W.VA) apart from other governors who pushed for regressive tax cuts that primarily benefited upper-income households and businesses.

West Virginia’s Tomblin recently upped the ante, too, asking lawmakers during a special August 2011 session to end the state’s sales tax on food altogether, given the state’s finances were continuing to perform well.  The House and Senate heeded the governor’s request and agreed to phase out the remaining two percent sales tax on food by July 1, 2013. 

The phase-out is contingent on the health of the state’s Rainy Day Fund, which must be equal to or greater than 12.5 percent of the General Revenue Fund at the end of 2012. If that goal is met, the sales tax on food will be reduced to one percent on July 1, 2012 and totally eradicated on July 1, 2013.

While West Virginia’s decision to eliminate the sales tax on food is certainly more beneficial to more families than other states’ efforts to eliminate corporate and personal income taxes, there are smarter, more targeted strategies available to lawmakers seeking to improve the fairness of the sales tax and support working families.

As an updated ITEP brief explains, targeted tax credits are a preferred alternative to exempting products, such as food, from the sales tax base. 

Sales tax exemptions have two main disadvantages as policy. First, they make the sales tax base (that is, the total dollar amount collected from taxable items) much narrower, and reduce the yield of the tax.  Second, they make the exemptions available to all taxpayers, regardless of need or income.  For example, the poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries while the rest goes to wealthier taxpayers who can more easily afford to pay the grocery tax.

Targeted credits, on the other hand: are designed to apply to specific income groups deemed to be most in need of tax relief; are available only to in-state residents; can be less expensive than exemptions, and; do not affect the stability of the sales tax as a revenue source.

Rather than wholly eliminate the sales tax on food, West Virginia lawmakers could have followed the model of 24 states which have wisely enacted a state Earned Income Tax Credit to ensure the tax cut will primarily benefit low- and moderate-income families, those who need help the most and spend a larger proportion of their incomes on food.  Alternatively, a refundable food tax credit, implemented in Kansas, Oklahoma and Idaho, which helps offset sales taxes paid on food, would be a more preferable policy as it is also 1) targeted to taxpayers who need it most and 2) less disruptive to the state’s revenue – two characteristics of the smartest tax policies.

Photo via Judy Baxter Creative Commons Attribution License 2.0

You may have heard of the "no new taxes" pledge, which is promoted by the extreme anti-government organization, Americans for Tax Reform (ATR), and its leader, Grover Norquist. What you may not know is that the pledge bars lawmakers from allowing voters to choose for themselves whether or not to raise taxes. At least that's the latest word from Norquist, who is apparently the sole adjudicator of the meaning of the pledge.

In Arkansas, four legislators who signed the pledge are defending their vote to allow Arkansans to decide whether to increase the state’s diesel fuel tax by five cents per gallon. There's an argument to be made that legislators really ought to make these types of decisions on their own. After all, isn't that what they're paid to do? But this is not the sort of criticism that Arkansas lawmakers are hearing these days.

Instead, the criticism is coming from Grover Norquist and ATR. Business Week reports that several legislators actually voted against HB 1902 because they feared the wrath of Norquist.

What many lawmakers probably thought was a political gimmick when they signed onto it has clearly become a ridiculous obstacle to rational, representative government, as lawmakers become fixated with the opinions of Norquist rather than the opinions of their constituents.

And it hardly helps policymaking when lawmakers are tied to simple, black-or-white dogmas that they feel forced to carry to any and all extremes. Elected officials are put in office so they can, in the words of one of the legislators taking heat, “consider all bills based upon their individual merits.”

Oklahomans are asking questions about the “no new taxes pledge” as well. Recently Grover Norquist said that Oklahoma policymakers supporting a hospital provider fee would violate the “no new taxes” pledge.

A recent blog post from the Oklahoma Policy Institute (OPI) asks simple, yet important questions. “When lawmakers sign a pledge, who are they working for?... Should they adhere to the dictates of outside groups that always take the most simplistic and extreme stance on their particular issue, regardless of the context for Oklahomans?”

OPI also discusses members of Congress and their controversies concerning ATR's pledge. When Senator Tom Coburn said that he was in favor of eliminating ethanol tax subsidies and using the revenue to pay down the national deficit, Norquist said that this position was in violation of the tax pledge.

Coburn responded, “The pledge to uphold your oath to the Constitution of the United States? Or a pledge from a special interest group who claims to speak for all of American conservatives, when in fact they really don’t?”

As OPI puts it, “Leaders now have a choice: do they represent Grover Norquist, or do they represent Oklahoma?”

In just the last few weeks, Arkansas and Illinois joined New York, North Carolina, and Rhode Island in enacting legislation requiring some online retailers, like Amazon.com, to collect sales taxes on purchases made by their state’s residents.  At least a dozen other states are considering enacting similar policies, and the list of states with a serious interest in this issue seems to be growing by the week.  In a new brief, ITEP explains the basics of so-called "Amazon taxes," and discusses the actions that Amazon, Wal-Mart, Home Depot, and other retailers have taken during this new surge of interest in sales tax reform.

Read the ITEP brief.

Lawmakers in almost every state (44 according to the Center on Budget and Policy Priorities) must close significant budget gaps again this year.  Despite these continuing fiscal woes, a variety of costly tax cuts -- from reductions in corporate tax rates to new capital gains breaks -- have been proposed alongside massive spending cuts in many of these states.

But West Virginia and Arkansas are among the six states not reporting budget gaps this year -- a fact which has provided them with somewhat more flexibility to consider reducing taxes. In this context, both Arkansas and West Virginia lawmakers recently enacted reductions in their states' sales taxes on groceries.  As of July 1, 2011, Arkansas’ sales tax rate on groceries will be lowered from 2 percent to 1.5 percent.  West Virginia’s rate will drop from 3 percent to 2 percent starting January 1, 2012.  These cuts were championed by Governors Beebe and Tomblin as a means to provide immediate assistance to taxpayers (in particular low-income households), and as a way to stimulate their states' economies. 

But reducing the sales tax on groceries is not the most targeted approach available to state lawmakers looking to support working families.  The poorest 40 percent of taxpayers only receive about 25 percent of the benefit from exempting groceries in most cases. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries.  Increasing Arkansas’s refundable state Earned Income Tax Credit (EITC) or enacting a state EITC in West Virginia would have been a better targeted alternative for ensuring that the tax cuts would reach low- and middle-income working families.  However, when viewed alongside the sharply regressive and completely unaffordable tax cuts being considered in so many other states, Arkansas and West Virginia lawmakers should receive some credit for at least enacting progressive tax cuts that benefit low- and moderate-income households the most as a share of their incomes.

Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.

Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.

Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

 

Trouble is brewing in Arkansas. Tax fairness advocates are anticipating that legislation to further reduce the amount of taxes paid on capital gains income will be a hot issue in the upcoming legislative session. Arkansas Advocates for Children and Families (AACF) released a brief this week explaining that Arkansas already offers a 30 percent exclusion for capital gains income and is one of only eight states that offers a substantial tax break for capital gains.

CTJ and ITEP have long argued that all types of income, including capital gains, should be taxed in the same way. Providing special breaks for capital gains is regressive, in addition to making tax rules needlessly complicated. Most low- and middle-income families don't have any capital gains income and therefore don't benefit from this tax break.

The AACF brief cites ITEP data and explains, “For 2010, the poorest 80 percent of Arkansas taxpayers (those with incomes less than $71,000) are projected to earn only 2 percent of the capital gains income earned by the state’s taxpayers. In contrast, the top 1 percent of Arkansas taxpayers, those with incomes of $352,000 or more, will likely earn 75 percent of all capital gains income in Arkansas.”

Further enhancing the already generous exclusion would benefit well off Arkansans, cost the state valuable revenues, and certainly do nothing to improve tax fairness. For more on capital gains taxation in the states, see ITEP’s report on this issue.

Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.

This week the Arkansas Legislative Task Force on Reducing Poverty and Promoting Economic Opportunity released thirty-one recommendations for reducing poverty in the state. Rich Huddleston, co-chair of the task force and Executive Director of Arkansas Advocates for Children and Families said, "Poverty hurts individual Arkansans, but it also has a long-term impact on our economy. Our businesses need a healthy, educated work force. To get there, we need to ensure that our children are in good shape and get a quality education." 

Not surprisingly, the panel found that tax policy has a role to play in poverty reduction. The panel recommended a variety of policy changes including: creating a state Earned Income Tax Credit, fixing the Arkansas low-income tax threshold, and continuing efforts to cut the state sales tax on food. See the panel’s full recommendations here.

Arkansas, of course, is not alone in having sensible options for using the tax code to reduce poverty. To read about more effective anti-poverty strategies in your state, read ITEP’s report: Credit Where Credit is (Over) Due.

On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.

ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.

Earlier this summer the Census Bureau released data that revealed which states can be considered "low tax" states. We took a closer look at the data and found that while a handful of states could be considered low tax states overall, their taxes are not low for poor and middle-income families.

In fact, in six states — Arkansas, Arizona, Florida, Tennessee, Texas, and Washington — there is a fundamental mismatch between the Census data and how these supposed low tax states treat people living at or near the poverty line. One of the major reasons for this is that these states have largely unbalanced tax structures. Florida, Tennessee, Texas, and Washington rely heavily on property and sales taxes because they don't have a broad-based personal income tax. (For more on a Washington ballot initiative to introduce an income tax, see our Digest article below.) Despite having income taxes, Arkansas and Arizona rely heavily on sales taxes, thus making their tax structures balanced on the backs of low- and middle-income taxpayers.

The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.

Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.

Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it's the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled "Cigarette Tax Rates and Revenue" found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).

Arkansas legislators have put off until next year a proposed 50 cent hike in the cigarette tax from 59 cents per pack to $1.09 per pack. The increase is expected to generate about $71.1 million in state tax revenues. This money would be used to fund a badly-needed state trauma system to respond to emergencies in which victims must be sent quickly to nearby specialists. Arkansas is one of the only states lacking such a vital infrastructure. The trauma system is estimated to cost $25 million a year and the extra revenue would be used to fund community health centers and charitable clinics serving the poor.

Arkansas currently ranks in the middle of its neighboring states in terms of its cigarette tax. If the tax is raised, Arkansas will have the second highest tax in its region, behind only Texas' $1.41 per pack tax. The situation in Maryland last year almost exactly parallels the one that Arkansas is facing this year. When Maryland's cigarette tax was $1.00 per pack, the tax ranked exactly in the middle of those of neighboring states. After the tax doubled to $2.00 per pack, it became the most expensive among Maryland's neighbors.

So what does all this mean? In a recent Wall Street Journal editorial, Maryland's cigarette tax hike was slammed as a failure because, the author speculated, it did not deter smoking and the state lost sales to nearby Virginia, where a carton is almost $15 cheaper. And as usual, the WSJ misleads its readers with anti-tax rhetoric, implying that higher tax rates decrease tax revenues. But if Arkansas lawmakers take a closer look at the numbers cited in the Wall Street Journal piece, the outlook for their proposed increase appears feasible, at least in the short term.

The editorial states that Maryland's cigarette sales fell 25% after a 100% tax increase. But what is craftily omitted is that this does not mean that tax revenues will fall. In fact, quite the opposite should happen. The tax increase is large enough to offset the fall in sales so much that the state should actually gain 50% more in cigarette tax revenue thanks to the hike. And just as Marylanders descended upon their neighbors to take advantage of cheaper cigarettes, it is highly likely that Arkansans will do the same. But the purpose of the Arkansas tax is to generate at least $25 million each year to fund an essential trauma system, not to deter smoking. Indeed the tax may help to curb the habit, especially among youths but even if smokers in Arkansas leave the state to shop for smokes in Missouri or Mississippi, where the taxes are the lowest in the US, sales within the state are still likely generate a sizeable and sufficient amount of tax revenue because the increase in the tax is so high.

So what is the drawback to this plan? The percentage of smokers in the US, along with the number of cigarettes sold, declines steadily each year. While Arkansas and Maryland risk losing business to neighbors, they also risk losing a sizeable amount of business to quitters and the declining number of new smokers, regardless of the size of their cigarette taxes. This means that an essential program that requires yearly funding cannot be viably sustained by a tax on a product for which demand is shrinking. The policy may be a responsible budgetary decision in the short term, when money is tight and the tax is likely to generate a sufficient amount of revenue. But as time goes on and smoking becomes increasingly unpopular (regardless of price), Arkansas will have to find another way to fund its trauma system.



Severance Taxes in The News



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Arkansas Governor Mike Beebe has called a special session starting Monday to consider a higher severance tax on natural gas. The Governor says that the tax hike will eventually raise as much as $100 million to help pay for state highways. The current level of tax was established in 1957 and is based on the volume of gas extracted. Beebe's proposal would change the tax base to market value, bringing Arkansas in line with what most states have been doing since the 1970s. Basing the tax on market value would ensure that inflation will no longer erode the value of revenues generated by the tax, which is currently providing natural gas companies with an effective tax cut each year. A 2003 ITEP study of the Arkansas natural gas tax found that if the state had imposed a 5 percent tax on the market value of natural gas in 1975 (rather than basing the tax on volume) the state would have raised $610 million between 1975 and 2001, instead of the $13 million it actually collected. For more on the state's severance tax and potential reforms read this report from Arkansas Advocates for Children and Families.

Higher severance taxes may soon be on the agenda as well in Colorado, where environmental groups and higher education advocates have banded together in support of a ballot initiative to generate $200 million in additional revenue from the oil and gas industries. The proposal would eliminate several severance tax deductions and exemptions, the most notable of which allows companies to write off 87.5 percent of their property tax bills. The revenue generated would go to fund college scholarships and renewable-energy programs, among other things.



Reducing Grocery Taxes: "Yes, but how?"



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Four states - Mississipi, Tennessee, Arkansas, and Idaho - are currently debating ways to reduce the sales taxes paid on food. But how (or whether) to pay for the cuts and who should benefit remain key sticking points.

On Thursday, the Mississippi House of Representatives passed (91-27) a "tax swap" bill that would cut the state's sales tax on groceries in half and raise the tax on cigarettes to $1 per pack. The bill still faces significant challenges before becoming law, however, since key members of the Senate oppose it and Governor Haley Barbour vetoed a similar bill last year. Although the plan's reliance on revenue from cigarette taxes is not a long-term solution, it does offer a temporary mechanism to make up the revenue that would be lost from a cut on the sales tax on food.

In Tennessee, a similar "tax swap" is under consideration. However Gov. Phil Bresden has expressed reluctance to link a cigarrette tax increase with a grocery tax reduction, and has instead proposed using revenue from a cigarette tax increase for education funding.

Arkansas Gov. Mike Beebe signed a grocery tax reduction into law on Thursday that will reduce the state's sales tax on groceries from 6% to 3% effective July 1st. However, no funding mechanism was enacted to make up for the decreased revenue, as lawmakers instead decided to rely on a projected surplus to pay for the proposal.

In Idaho, Gov. Butch Otter continues to struggle with the state legislature over how best to enact a grocery tax credit. Otter's proposal would target low-income Idahoans with a credit of up to $90, while the House's newly passed version would give a smaller grocery tax credit (up to $50) to a broader range of residents.

Last week there were three states offering competing tax incentives for a new ThyssenKrupp steel mill. Now there are two; ThyssenKrupp has taken Arkansas out of the running, leaving Alabama and Louisiana as its final two candidates. In a press release announcing the move, the company explained its rationale for dumping Arkansas: "geological conditions, energy costs and logistical disadvantages." Notably absent from its explanation: tax breaks.

And elected officials in the two remaining states seem to agree that non-tax factors set one state apart. Louisiana Governor Kathleen Blanco boasts and, Alabama Governor Bob Riley openly admits, that Louisiana has geographic advantages that Alabama can't match.

But Riley and some state lawmakers are pushing for a special legislative session later this month that would be devoted entirely to creating a new fund for tax incentives for ThyssenKrupp and other companies the state is currently courting. If this sounds like a devious subversion of market forces, it is ... but Louisiana already did the same thing back in December, creating a $300 million fund to court the steelmaker.

How can states short-circuit this self-destructive competition of tax giveaways? Lessons might be learned from efforts by European Union members to prevent tax competition that distorts market forces, which culminated this week in an EU statement that Switzerland must curb its corporate tax giveaways.

Arkansas Governor Mike Beebe and the state senate worked together this week to pass a series of measures aimed at helping low-income Arkansans.The keystone of the tax package was a cut in the state sales tax on groceries from six percent to three percent, one of Governor Beebe's leading campaign proposals.A study by the Arkansas Advocates for Children and Families (AACF) projected annual savings for a family of four ranging from $98 to $298, depending on income level.The Governor's Office estimated that the sales tax change would cut state revenues by $252 million this year.Everyone involved in the effort to pass this bill deserves high praise for bringing attention to this important issue.However, research by the AACF using ITEP data indicates that a refundable Earned Income Tax Credit might be an even more effective way to help low-income Arkansans.According to the data, a 24% refundable EITC would cost almost exactly the same as the grocery sales tax exemption, but would provide more assistance to families in need.Arkansas lawmakers should consider a refundable EITC to get the most bang for their tax bucks.

On Wednesday newly elected Arkansas Governor Mike Beebe kept a campaign promise and proposed a cut in the state's sales tax on food. The proposal would cut the state's 6 percent sales tax, as it applies to groceries, by half. The Governor hopes to eventually repeal the tax on food altogether. However, the price tag for this cut is over $200 million and the benefits from this tax cut aren't targeted towards those who need it. Also, despite the state's recent higher-than-expected revenues, many advocates are worried the funding for the tax cut could come from education or other programs.

A similar discussion is taking place in Idaho, where Governor Butch Otter is proposing a more progressive approach to this issue. His proposal would keep the grocery tax and would instead offer a low-income tax credit designed to offset it. For more on the relative merits of exemptions and credits as strategies for making sales taxes less unfair, check out this ITEP Policy Brief.



Hot Topic: Severance Taxes



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States that enjoy a large endowment of mineral resources usually levy a severance tax on the extraction of these resources and these taxes are receiving a lot of attention these days. In Colorado the Auditor's office found that many oil and gas companies may not be filing tax returns. Officials in West Virginia worry that coal severance taxes are on the decline there, while advocates in Arkansas say that now is the time for severance tax reform. For more on this, read the report "Digging Deeper," from Arkansas Advocates for Children and Families.

Several states are debating ways to spend budget surpluses.

Arkansas Governor Mike Huckabee has "tax reformation" plans which include putting more money in a rainy day fund and rebating money to taxpayers in the form of a tax credit.

In response to the surplus in Idaho, legislators are debating ways to shift the tax burden from property taxes to regressive sales taxes.

North Carolina legislators are taking notice of the financial hit that mental health services took during the previous recession and both houses have passed budgets that would provide more funds for these services. Of course, if any of these states had a Colorado-style TABOR policy there wouldn't even be a question about how to spend state surpluses because TABOR takes these important budget decisions out of the hands of elected officials.

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